Education and Income Inequality
Income
inequality occurs when a significant difference exists within a society’s
lowest and highest wage earners. Income inequality occurs in every country for
various reasons including gender, race, religious beliefs, and education level.
Income inequality can affect a country’s economy, crime rates, education, and overall
health of the citizens (Choi, 2016). The way a country measures income equality
is by comparing the lowest and highest incomes of all the workers. Corrado Gini
developed the Gini index to measure income distribution on a scale of zero to
one. A Gini score of zero means perfect income equality, while a score of one
represents perfect income inequality (Choi, 2016).
In
the United States, the Gini coefficient continues to rise consistently. In 1979
the World Bank reported a Gini score of 35 to which rose to 41.6 in 2016
(World, n.d.). The higher the Gini
coefficient, the greater the income margin. Twenty-five percent of Americans workers
make less than $10 per hour (Amadeo, 2018). The government set the minimum hourly wage at
$7.25, which is not a livable wage by current economic standards. By 2015, the
top ten percent reported approximately nine times the salaries of the remaining
ninety percent. The difference substantially increases for the top one percent
as this group earns forty times more than the bottom ninety percent (Amadeo,
2018). This difference in income not only affects the lower-income earners but
the overall economy. Economists continue to search for solutions. Some economists
believe that employers create income inequality because of the increased demand
for higher educated workers (Gould, 2015). Others argue that higher education
will not decrease the inequality as it does nothing to redistribute funds
accrued by higher earners. By analyzing several factors, it is apparent that several
changes must occur regarding education level, income distribution, and wages to
encourage economic growth and diminish income inequality.
Income
Inequality and Economic Factors
The Organization for Economic
Co-operation and Development (OECD) found a negative correlation between income
inequality and economic growth. As the Gini index increased over the last
twenty years the economic growth value decreased by 0.35 percent annually
(Sherman, 2014). Economic growth occurs
when consumers spend money, but consumers are not spending as much as needed
for that growth. Economic growth is stifled when income becomes concentrated
towards the top ten percent, but not consumed, which is the current trend.
Economists have several theories regarding
the cause of income inequality. The classic economic theory proposes that
economic growth is affected by savings and consumption. The political economy
approach suggests that income equality encourages economic growth (Malinen,
2010). Economists have found it challenging to prove an empirical relationship
due to the lack of consistently measured data. By extrapolating data from
thirty-eight countries, one promising study found a connection between income
inequality and economic growth. Malinen’s (2010) study supports the idea that, “Income
inequality is associated with lower long-run economic growth in rich economies”
(p. 225).
As the unemployment rate increases, the
income inequality gap widens. The unemployment rate is a gauge for a country’s
economy that limits economic growth. The unemployment rate is also closely
linked to income inequality. A high unemployment rate indicates that the
economy is operating below production capabilities and not efficiently using
resources (Economy, 2010). Essentially,
the less money an individual earns, the less money a consumer can spend on
goods and services which drives the economy.
Income Inequality
Continues to Widen
From
1960 to 1980, incomes increased at a similar steady rate for everyone. The top
five percent would receive a 4 percent wage increase, while the remaining
ninety-five percent gained 3.89 percent. From 1980 to 2007, wage increase
started to divide. During this time, the top 5 percent gained five percent,
while everyone else received only 2.6 income growth (Fletcher, 2014). It is
impossible for the lower earners to keep up with the more significant growth
obtained by the highest earners. These percentages help grow the income divide.
The Great Recession of 2008, which
began as a mortgage crisis in 2006, remains a factor for income inequality
(Amadeo, 2019). A decade later, unemployment is at its lowest, and the stock
market’s strong performance, forty percent of Americans struggle to pay for
necessities (Picchi, 2019). Seventy percent of the economy is consumer driven.
During the recession, consumer spending dropped, which the highest level of
income earners currently contributes the same as before the recession
(Fletcher, 2014). The bottom ninety-five percentage has yet to recover from the
recession and therefore contribute much less than before (Fletcher, 2014). To
put that decrease in perspective, the Forbes top 400 earners, make more money
than over sixty percent of most American households (Kirsch, 2017). Some
economists believe that this inability to rebound quickly correlates to one’s
education level since individuals with low levels of educational attainment
feel the impact of a recession harder than those with advanced skills and
degrees (Strauss, 2014). Is education level a significant determinant of income
inequality?
The Education
Gap
Due to income inequality and education,
one might say that two vastly different countries coexist within the United
States (Strauss, 2017). But how closely
related are education and income? Since the 1970s, the wage gap has widened between workers with
advanced degrees and those without (Choi, 2016). Data from 2009 shows that
people with advanced education earned approximately six times more than those
without a high school diploma (Strauss, 2017). The lifetime earnings of college
graduates are almost twice as much as someone without an advanced degree (Hershbein,
Kearney, & Summers, 2015). Not only does additional education increase
wages, but individuals pursuing this education may strengthen the economy in
other ways. For example, a higher educated society may produce more business
owners and entrepreneurs (Rothwell, 2015).
The inequality gap between educated and
less-educated workers continues to widen. Some economists see income inequality
as a response to employers’ increasing demand for skilled, knowledgeable
workers and a shortage of higher skilled workers (Gould, 2015). Some economists
claim that, “Technological developments, globalization, and trade…have weakened
the relative earning of those with a lower level of skills” (Hershbein,
Kearney, & Summers, 2015, para. 1). But does increasing one’s skill set and
value in a competitive market decrease income inequality?
Will Higher
Education Lower Income Inequality?
Since the wages differ for college graduates versus those
with a high school diploma or lower, one might assume that the provision of
education would help decrease income inequality. One simulated study analyzed
the effects on income inequality if ten percent of those with no higher
education obtained degrees. The study consisted of data from 38 countries of 25
to 64-year old men. The results concluded that while the wage increases from earning
a degree would redistribute the income within the bottom 25 percent, the
increase did not affect income inequality much. For example, before the
economists altered the data, the Gini score measured at 0.57, which decreased
to 0.55 after factoring for additional education (Hershbein, Kearney, & Summers,
2015). Since the resulting change is only 0.02, the results reflect that increasing
one’s education and salary will not correct wage inequality on its own. Due to
the study results, the economists theorized that since increasing the bottom
earners’ wages had little effect on income inequality, then changing the income
for the top earners will have more of an impact (Hershbein, Kearney, &
Summers, 2015).
How to Reduce
Educationally-based Income Inequality and Other Factors?
Indeed,
increasing one’s education skills benefits the individual, but the education
level is not the entire solution for diminishing the income gap. Even students
with four-year degrees have experienced periods of lower demand. In fact,
between 2013 and 2014, wages rates dropped 1.3 percent for those with four-year
degrees and 2.2 percent for those with advanced degrees (Gould, 2015). ). If
education determined demand, then these wage rates would continually increase
rather than experience a decrease or plateau. However, most individuals with
degrees maintained a higher wage than those without college diplomas during the
recession (Rothwell, 2015).
Continued
education not only benefits an individual economically, but it also promotes
the growth of the country’s economy. The government and colleges must decrease
the costs of college and student loans, so that obtaining an advanced degree is
affordable to lower income families. Often low-income earners find themselves
caught in cyclical debt and unable to grow and the children suffer from lack of
funds and opportunities. College should
be available for everyone because, “Investing in human capital is the best way
to increase individual wealth and improve labor force” (Amadeo, 2018, para.
18).
Some economists believe that the
widening of income inequality is the result of the government’s failure to act
rather than education levels (Hill, 2015).
The government needs to assist in creating and enforcing tax rates that
promote economic growth. Increasing taxes for individuals on the high end of
the wage distribution may help raise the lower class and lessen income
inequality, but additional tax will not resolve the issue entirely. Even if a
high-earner contributed half of his salary to a low-wage family, it would not decrease
income inequality overall (Rothwell, 2015). Wealth distribution is necessary.
Currently, the bottom earning forty percent supports the market, and there are
not enough funds that are accessible for that group to support the economy and
top earners (Amadeo, 2018). The government must increase taxes for the top
earners and lower taxes for the bottom earners to decrease the wage gap.
The way to distribute the income is to
encourage higher earners to spend more money through taxes and increased wages.
In addition to adjusting taxes, the government can increase the minimum wage
from $7.25 an hour to at least the $15 minimum recently adopted by Amazon. These
raises will increase the spending power of those within the bottom 50 percent which
will continue to strengthen the economy.
There are many economic theories
regarding how to increase income equality, but there is no single, simple solution.
While increasing education, taxes, and wages will not separately lessen wage
inequality, together these changes may make an impact. Improving one’s
education and skills make a worker more valuable, which generally equates to
increased wages and a lower chance of unemployment. Increasing taxes for the
top earners will release the lower income individuals from the burden carrying
the economy. Subsequently, the government can redistribute the money to areas
of need. Raising the minimum wage will put more funds into the economy to allow
for growth. All of these changes will encourage economic growth and lessen wage
inequality.
References
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(2018, October 10). Income inequality in America: Causes of income inequality.
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